The Dow Jones fell 2.84% on June 26, falling 9.27% from its high for the month. As high-risk assets are afraid of a correction, the vulnerability to a short-term drop in Bitcoin prices (BTC) may increase.
While many fundamental factors are causing a downward trend in the stock market, Analysts point to declining liquidity as the main catalyst. As the Federal Reserve’s balance sheet began to shrink, US stocks fell one by one.
The correlation between Bitcoin and the actions of the United States in recent months increases the likelihood of a BTC price drop.
All markets are moving cautiously and Bitcoin is no exception.
Holger Zschaepitz, a world market analyst explained, that investors were initially motivated by the Federal Reserve’s aggressive liquidity injection. As liquidity slowed, various risks, such as the number of coronavirus infections, began to affect investor sentiment.
Correlation between the US stock market and global liquidity. Source: Holger Zschaepitz, Bloomberg
Referring to the graph showing the correlation between the SP 500 and global liquidity, Zschaepitz wrote::
“This graphic shows that equity investors like a drug addict are dependent on new impulses. Without new liquidity from the central bank, a challenging global economy, high stock market valuations and increasing greedy cases are again important. “
Similarly, Bitcoin’s price dropped sharply when the U.S. stock market initially pulled out. The Dow Jones experienced its first major decline in the week of June 23. Bitcoin also declined sharply on the same day, at $ 9,700, and fell 7% in 24 hours.
Bitcoin falls 7% in 24 hours on June 23 as stocks fall. Source: TradingView.com
For the past two years Bitcoin’s price showed little or no correlation with stocks and moved due to its own market dynamics. However, the surprising correlation between Bitcoin and stocks, particularly in the second quarter of 2020, shows that investors are still very uncertain.
Is a short-term correlation a bad thing?
Plan B, the pseudonymous creator of the stock-to-flow model, He said the short-term correlation between Bitcoin and stocks could be positive.
The simultaneous rise between Bitcoin, stocks, and other risky assets could indicate that the traditional stream views BTC as an established asset.
“I see it as good news. I would be really worried if all these billions would go into stocks, bonds, real estate, gold … but not Bitcoin. The Fed is also pushing stocks. So if you know stocks and stocks Holding Bitcoin together, BTC is aligned with the interests of the Fed. “
If the Federal Reserve increases its liquidity again due to the deteriorating mood in the US economy, this can also benefit Bitcoin’s price development.
In the short term, however, BTC diagrams indicate that a steeper decline is still possible. Technical analysts anticipate a possible decrease to $ 7,000, a decrease of around 20%, considering that the $ 9,000 support level has been exhausted.
Yesterday Cointelegraph Markets reported that popular market analyst Tone Vays expects the $ 6,000 to $ 10,000 range to remain in effect at least until the end of this year.